Like brakes to a bicycle, fintech must exist within the realms of regulation if it is to ditch its ‘wild west’ persona. Indeed, the adoption of various elements of the industry, like cryptocurrency, has ultimately suffered due to the lack of regulation that surrounds and supports them. Throughout the entire month of May, The Fintech Times will focus on highlighting the most current developments in this ever-perplexing and constantly-changing foundation of regtech.
Open banking has already begun to revolutionise the financial ecosystems using it. With the UK being a front runner in the technology’s rollout, it is possible to look back on the last five years and analyse how the regulatory developments have impacted both fintechs and incumbents in the financial sphere. We spoke to various experts from the industry to hear about what they believed had changed.
Creating an innovative ecosystem
Lawrence Byers, product manager at Acquired said, “Open banking can help mitigate risk to the lenders. With access to a customer’s raw transactional data, Account Information Service Providers (AISPs) can create a financial footprint for each customer based upon their financial habits, which allows lenders to identify and anticipate potentially vulnerable customers, and take preventative action.
“Payment Initiation Service Providers (PISPs) offer an alternative service to AISPS, as they are authorised to initiate payments directly from the customers bank account (as opposed to accessing the customer’s account information). To date it has been primarily AISPs that have been driving open banking adoption for UK lenders, however, the potential capabilities that PISPs could offer lenders through Variable Recurring Payments (VRPs) suggests that this may change.
“From July 2022, the nine largest banks in the UK (commonly referred to as the ‘CMA9’) will be required to provide PISPs with access to their VRP APIs for sweeping use cases. Sweeping is the automatic movement of funds between different bank accounts held in the same customer’s name, think of them as ‘me-to-me’ payments, i.e., funds being automatically moved from a customer’s HSCB account to that same customer’s Barclays account. Reasons for sweeping could be, for example, a customer looking to maximise optimal interest rates across accounts, which the PISP would automate.
“Whilst exciting, however, the real opportunity for lenders here is the possible expansion of the VRP infrastructure beyond the sweeping use cases and into ‘me-to-business’ payments. For lenders, the ability to collect variable payment amounts on an ongoing basis would establish open banking payments as a real alternative to direct debit, offering the same flexibility, but with real-time settlement, no chargebacks and all for reduced fees.
“Although still a relatively new concept, the increasing presence of open banking is forcing lenders to become more agile and innovative to remain competitive. Furthermore, this increasing presence is raising the bar of expectations for customers looking for easy access to credit. Whilst ‘open banking’ will probably never come up in ordinary conversation down the pub, it’s a term that will nevertheless be omnipresent in the lending sector. After all, a penny saved through open banking is a penny earned.”
Machine learning, blockchain, AI and more are solving regulatory compliance issues
Kunal Sawhney, CEO of Kalkine Group said, “The open banking space is an ever-developing field even as the digital transformation in the banking sector has come of age. Open banking comes with a bevy of advantages being a driving force of innovation that is reshaping the banking industry. However, it also carries risks for consumers as their data is shared extensively. Immediate and unhindered access to user data is always fraught with unforeseen eventualities, even though theoretically it is called to be secured.
“Moreover, rapid digital disruption within the banking sector, rules, and best practices can turn turtle as fast as they are introduced. Hence, the regulatory space for open banking is also evolving in tandem to safeguard consumers as well as the banking partners.
“Especially in the last few years, there have been drastic changes in the regulatory space governing open banking, augmented by technological advancement.
“It is indispensable to spruce up the regulatory space for open banking to safeguard consumers. The regulatory space is leveraging technology to keep the open banking space spotless with no margin for error. Technological innovation is helping the implementation of regulations and keeping a strict vigil on the open banking space.
“Machine learning, blockchain, natural language processing, and artificial intelligence are constantly solving the issues for regulatory compliance. AI-powered solution for regulatory changes is one such sweeping change that has been developed in the open banking sector.
“Apart, the development of the obligation management tools is helping to automatically deliver a complete obligation register saving hundreds of hours.
“These remain some of the key developments in the regulatory compliance for open banking in the last five years, assisting not only the incumbents but also the fintech.”
More specific, outcome-oriented regulations since 2017
Don Cardinal, managing director at Financial Data Exchange (FDX) said, “Five years seems like eons in the open banking/open finance space. While FDX does not comment on regulations or policy, we do monitor the regulatory space for impacts to our technical standards as financial services is a highly regulated space. In addition, we are in contact with regulators, lawmakers, and others to help educate the ecosystem on technology and best practices. As such – we have observed some trends:
“Starting in 2017 with the CFPB Consumer Protection Principles for financial data sharing – we saw activity in the regulatory / lawmaking space as generally principles-based, mostly conceptual, and less frequent.
“Fast forward to early 2021 – where we begin to see several regulatory developments in North America in support of open banking/open finance. These have been more specific, outcome-oriented, more frequent and accepting of the role of the industry in developing technical standards within a given set regulatory guidelines. The expectation is these trends will accelerate.”
Economic incentive is a new priority
Michael Scarpa, managing director of KPMG’s Financial Services Regulatory Compliance and Risk practice said, “Open banking, a long-anticipated market force, is expected to give consumers unprecedented control over their financial data and reduce traditional barriers to inclusion in the financial marketplace. Institutions are increasingly making inclusion a central part of their strategy in response to regulatory expectations, economic incentive to do so, and social pressures, including those driving the global trend towards corporate Environmental, Social, and Governance (ESG) initiatives. Firms that deliver these services have the opportunity to expand market share and be a leader in responding to demands for innovative banking solutions.
“Given the lack of action from US federal regulatory agencies on open banking, unlike in Europe with the PSD2 framework and GDPR already enacted, the approach we are seeing from our US clients and the industry in general is to buildout their processes using standardised APIs that meet the requirements of both. Part of CFPB director Rohit Chopra’s Congressional testimony late last month included the following statement: ‘New technologies and systems can bring us faster payments and new opportunities to connect customers and financial providers. During my tenure, the CFPB will be very focused on what the future holds and how we can collectively shape it in ways that align with American values.’ However, regulators need to understand and act upon the pain points felt in the industry and by consumers in that it is the consumer’s data and they should have more control over what is and is not/can and cannot be done with it. These technologies are here, and they currently provide faster payments and opportunities to connect customers with financial providers. Section 1033(consumers access to their data) of the Dodd-Frank Act was codified in July 2010, and consumers deserve to have this addressed sooner, not later.”